Law Blog – Business Law & Litigation
The Corporate Transparency Act (CTA), aimed at combating illicit financial activities, recently faced a significant legal challenge from a federal District Court in Alabama, which determined that the CTA is unconstitutional, but the decision only applies to the plaintiffs in that lawsuit. While the recent ruling casts uncertainty on the CTA’s future as the Alabama decision and other court rulings work their way through the courts, small businesses must continue navigating this landscape with an informed strategy, including assessing whether they are required to file a beneficial ownership disclosure with the Financial Crimes Enforcement Network (FinCEN) by the applicable deadlines in 2024. Applicable business entities formed prior to January 1, 2024 have until January 1, 2025 to file the requisite report with FinCEN. Entities formed after December 31, 2023 must file the FinCEN disclosure within 90 days of formation.
Understanding the CTA
The CTA was introduced to enhance transparency within the corporate sector, requiring U.S. and foreign entities which are not exempt under the CTA to report beneficial ownership information to FinCEN on an ongoing basis. The CTA’s goal is to deter and detect financial crimes such as money laundering and terrorism financing by shedding light on the true owners of businesses.
Notably, the CTA outlines 23 exemptions from the reporting requirement in order to mitigate the reporting burden on entities less likely to be used for illicit purposes and/or already regulated by other statutes. These exemptions cover a range of entities already under certain regulatory scopes, such as businesses with more than 20 employees, public utilities, banks, and insurance companies, aiming to streamline compliance requirements without duplicating existing regulations.
Most Small Businesses With < 21 Employees Not Exempt
One exemption that is particularly pertinent to small businesses is for “Large Operating Companies.” This exemption is designed for entities that meet specific criteria, reflecting their lower risk of being exploited for illegal activities due to their established business presence, existing transparency requirements and more formalized management. To qualify for this exemption, a company must:
1. Employ more than 20 full-time employees in the United States.
2. Maintain an operating presence at a physical office within the U.S.
3. Report over $5 million in gross receipts or sales, net of returns and allowances, with these figures drawn from the previous year’s federal income tax or information return.
This “Large Business” exemption recognizes that such companies typically engage in ordinary business activities and possess a level of transparency that aligns with the CTA’s objectives. If your business falls within this category, it is nevertheless crucial to maintain accurate records and documentation to substantiate your exemption status should it ever be questioned.
The Alabama Decision and Its Implications
The Alabama District Court’s ruling declared the CTA unconstitutional, primarily questioning Congress’s authority to enact such legislation. However, this decision currently applies only to the plaintiffs involved in that lawsuit. FinCEN has indicated it will pause enforcement against those parties, but it will continue to apply the law to all other applicable entities. In this context, it’s essential for small businesses to continue complying with the CTA’s reporting obligations while staying vigilant to legal developments regarding the Alabama case and others like it, which will likely meander through the court system (such as appeals) for the foreseeable future. Small businesses should be aware of these developments and check on compliance requirements regularly. Currently, the CTA requires applicable entities to file the requisite report once initially in 2024 and thereafter under certain circumstances such as a change in beneficial ownership.
Action Items for Small Businesses
Small businesses should first determine whether they fall under the CTA’s scope or qualify for any of the 23 exemptions. If your business meets the criteria for the “Large Operating Company” exemption or any other, ensure that you have thorough documentation to support this status. Moreover, exempt entities should continue to monitor the legal developments surrounding the CTA and cases like the Alabama decision which may nullify the CTA in the foreseeable future.
For businesses not exempted under the CTA, the statute mandates fairly immediate deadlines for applicable businesses to file the requisite beneficial ownership information report with FinCen. For non-exempt business entities that were formed before January 1, 2024, the deadline to file the first annual beneficial ownership disclosure report is January 1, 2025. For non-exempt entities that were formed on or after January 1, 2024, beneficial ownership information is to be reported to the FinCEN within the 90-day window following the entity’s formation. Entities formed on or after January 1, 2025 must file the disclosure report within 30 days of formation.
Conclusion
While the CTA’s legal challenges unfold, the importance of maintaining transparent and ethical business practices remains. Keep abreast of the evolving situation, consult with legal advisors, and prepare your business to navigate the complexities of the CTA. At the Law Office of Isaac H. Winer, we stand ready to assist with all of your CTA compliance requirements.
In the ever-evolving landscape of employment law, California’s Assembly Bill 1076, effective January 1, 2024, is a significant new landmark. This legislation clarifies the enforceability of noncompete agreements in the employment and consultancy context and has immediate implications for California employers and workers alike. Newly invalidated non-competes and related provisions require immediate attention for all parties involved. Businesses should consult with corporate counsel to ensure compliance with this new law. Workers should also consult with competent counsel to understand the implications of this new law on their freedom to work for competitive firms in the future.
The Essence of AB 1076
At its core, AB 1076 amends Section 16600 of California’s Business and Professions Code, invalidating any noncompete covenant on employees or consultants, irrespective of how narrowly tailored the clause might be. The law’s mandate to interpret the statute broadly extends beyond noncompete provisions, encompassing customer nonsolicitation provisions and similar clauses previously enforceable under California law. The law also requires immediate attention by parties to whom the new law applies because of a notice that is due this month, as discussed below.
The Sole Exception to the Law on Non-Competes in California
There is only one exception to the prohibition on non-competes in California, which exists in the context of business sales. When a party sells the goodwill of a business or otherwise disposes of a critical ownership interest, a non-compete agreement may be enforceable. This is to ensure that the seller does not engage in competitive activities that diminish the value of the entity or interest that is sold. This specific scenario recognizes the legitimate business interest in protecting the acquired business’s value and thus stands as the only recognized exception under California law. Here, too, consultation with corporate counsel can help parties better understand the contours of this law.
The Notice Requirement in AB 1076
A pivotal aspect of AB 1076 is the obligation it places on employers to send a notice to current and former employees (and almost certainly individual consultants, too) who meet specific criteria:
1. Post-1/1/22 Start Date: The worker must have been engaged to work after January 1, 2022.
2. California Residency: The worker must be located in California.
3. Presence of Unenforceable Provisions: The worker must have signed a written agreement containing a noncompete provision, customer nonsolicitation provision or other similar provision now rendered unenforceable by the new law. The notice, due by February 14, 2024, must inform workers of the void status of these provisions in California. This applies even if the provision was enforceable in another state when executed. Failure to provide this notice constitutes a violation of the state’s Unfair Competition Law, carrying the risk of civil penalties should the company be sued.
Implications for Employers and Employees and the Necessity of Legal Consultation
Employers with California-based workers should undertake an immediate review of all applicable agreements, including those signed by workers who relocated to California after signing enforceable agreements outside the state. The intricacies of AB 1076 necessitate a nuanced understanding of its provisions and potential implications for your business operations; thus, consulting with corporate counsel is highly advisable. Workers should also consult with counsel to ascertain if the new law applies to them, as may affect whether and how workers seek similar types of work in the future.
Why Consult Corporate Counsel?
1. Compliance Assurance: Corporate attorneys can guide employers and workers through the complexities of AB 1076, ensuring that all aspects of the law are addressed.
2. Risk Mitigation: Legal counsel can help identify potential areas of risk and develop strategies to mitigate them, safeguarding against inadvertent non-compliance.
3. Drafting Compliant Notices: Attorneys can assist in drafting and disseminating compliant notices to affected workers, a critical step in adherence to AB 1076.
4. Strategic Advisory: Given the broad interpretation of noncompete and similar provisions, legal advisors can offer strategic guidance on restructuring agreements and company policies in line with the new legal landscape.
Conclusion
The enactment of AB 1076 reflects a paradigm shift in the realm of noncompete agreements and underscores the importance of staying abreast of legislative changes that impact the employer-employee relationship. For those navigating these changes, consulting with an experienced corporate attorney is not just advisable; it is imperative. Obtaining detailed guidance and support in ensuring compliance with AB 1076 can help avoid costly litigation and lead to developing alternative methods to protect proprietary information and assets. Feel free to contact me for advice tailored to your needs.
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Summary: In the evolving realm of generative artificial intelligence (GenAI), companies and business people spanning many business sectors are increasingly likely to provide and/or utilize computer-generated content to advance their business activities and goals. This increasing use of GenAI in the business world creates potential new risks that vary depending on the party’s contractual perspective. For example, service providers – spanning from content creation to all forms of consulting to customer service and sales – seek broad exonerations and expansive IP rights to limit liability and increase productivity for the content output they provide to customers, while customers often desire a more limited contractual scope, stringent data protection and robust warranties for liability protection and data security for the data input they provide to get the output. With GenAI usable in a wide range of industries and jobs now, it is important to underscore the importance of consulting experienced legal counsel to negotiate business agreements to maximize a party’s rights and minimize their duties arising from the different types of uses of GenAI. Use of AI-generated content is probably already happening in your business whether you know it or not – think not only the content that may be your company’s work product but also all content that supports business operations. Legal expertise is crucial to draft tailored contracts that seek to maximize legal rights, manage risk, ensure legal compliance and leverage the promise of GenAI while appreciating its challenges in the changing legal landscape that relates to GenAI.
Much like a puzzle can reveal unexpected images when pieces are placed together, the use of GenAI in business — all forms of business activity — can bring unforeseen twists to standard and routine contract terms, disrupting conventional frameworks for contract drafting. Further, contract negotiations between content providers and customers – which includes most businesses – are marked by distinct, often contrasting priorities. Examining contractual perspectives across key contract terms affected by the use of GenAI sheds light on the nuances of various contractual considerations that have not been revisited for decades.
Contrary to initial instinct, GenAI technology is not confined to any single niche — for example, entering into a relationship with the company OpenAI in order to use its GenAI drafting technology. Content providers and customers/utilizers of GenAI span a diverse range of industries and business functions, each with unique applications and requirements. Different types of businesses and functions share the common trait of providing content to their own consumers, spanning many business types and teams including sales, marketing, management, PR, technical writing, consulting, translation, voiceover, sales, customer service, and more. The list of potential applications of GenAI in the business world is literally as broad as the business world itself.
With such a wide array of businesses and positions turning to GenAI to achieve their goals, the drafting of contracts regarding business activities that may involve the use of GenAI makes contract negotiation trickier than before GenAI existed. Each party to a contract brings its own set of expectations, requirements, and concerns to the table, influencing how GenAI-related contracts are negotiated and drafted. As a result, terms and conditions in contracts previously considered obvious and standard need to be reevaluated in light of the new issues raised by the use of GenAI in the business world. Here are some examples:
Scope of Contract
Provider’s Viewpoint:
Content providers favor a broader application of contractual terms in order to harness the full potential of GenAI, allowing for adaptability to product offerings as the technology evolves. This flexibility is seen as crucial for staying competitive and responsive to new technology and market trends. Providers may be concerned that overly limited contracts might limit their ability to innovate and respond to emerging opportunities and thus may wish to reserve contractual “space” to operate more freely in the future.
Customer’s Perspective:
Customers, seeking tailored solutions, tend to desire a more specific and limited contract scope. Their primary concern is ensuring that the use of GenAI meets their needs without overstepping boundaries such as the security and use of data. They are wary of broad scopes that could lead to their data being used in unintended ways, potentially leading to compromising sensitive information and risking liability.
IP Ownership and Licensing
Provider’s Viewpoint:
Providers emphasize retaining expansive IP rights over AI models and outputs to protect their R&D investments and sustain market position. They view these rights as integral to maximizing the potential of their technologies. This stance often stems from the significant resources invested in developing AI technologies, on which they seek to capitalize through broad licenses and related contractual provisions.
Customer’s Perspective:
Customers prioritize protecting their own IP, especially regarding proprietary data used in AI learning. They are concerned about losing control over their valuable assets and should be keen to ensure that their contributions are only used within agreed contexts. This concern is often rooted in the need to safeguard competitive edge and prevent unauthorized use of their data that could benefit competitors.
Representations and Warranties
Provider’s Viewpoint:
Content providers typically offer limited representations and warranties, balancing promises about AI capability with realistic expectations. They are cautious of overcommitting in areas like performance or accuracy, given the experimental nature of GenAI. Providers are mindful of the unpredictable outcomes that can arise from AI’s autonomous learning capabilities and seek to mitigate potential legal repercussions.
Customer’s Perspective:
Customers demand strong, reliable and all-encompassing representations and warranties to protect against the uncertainties of GenAI. They seek assurances that the content and increased functionality will be reliable, compliant with laws, and suitable to their purpose. Customers often view these terms as critical safety nets that protect them from the risks associated with integrating AI into their businesses.
Data Protection and Privacy
Provider’s Viewpoint:
Providers seek balanced data protection clauses that comply with regulations while allowing for the internal use of data to improve AI models and functionality. They often highlight the need for data to continually enhance AI technology, pushing for terms that don’t overly restrict their internal operations.
Customer’s Perspective:
Customers insist on stringent data protection, driven by concerns over data inaccurate GenAI drafting, and potential legal liabilities from data misuse and exposure. They demand clear, transparent terms on data usage, focusing on compliance with laws like GDPR and CCPA. This emphasis reflects a growing concern over data privacy and the need to maintain public trust, especially when dealing with sensitive or personal data.
Liability and Indemnification
Provider’s Viewpoint:
Providers seek to limit their liability, particularly in emerging areas of AI application where usage and outcomes can be unpredictable. They aim to protect themselves from potential lawsuits and losses that could arise from the novel and sometimes untested nature and unanticipated use of AI applications.
Customer’s Perspective:
Customers, aiming to safeguard their interests, negotiate for broader liability protections. They are especially concerned about AI malfunctions or data misuse that could lead to business interruptions or legal problems. Comprehensive indemnification clauses are seen as essential to cover these various risks, providing a layer of financial security. Providers are, of course, loathe to offer such protections.
Termination Rights
Provider’s Viewpoint:
Providers often prefer longer-term contracts with minimal termination rights to ensure a stable and predictable business environment. They argue that the continuity of long-term relationships is vital for providing effective AI-based services and recouping their substantial investments in AI development.
Customer’s Perspective:
Customers advocate for flexible termination rights to maintain agility in a fast-paced AI landscape where alternative AI solutions become increasingly available. They view the ability to adapt to new GenAI options or shift strategies as critical to their business success. Flexible termination rights are often seen as essential to avoid being locked into a service that may become outdated or less effective over time.
Dispute Resolution
Provider’s Viewpoint:
In disputes between Providers and Customers, Providers seek to limit public exposure and control the venue and sometimes the manner in which disputes are resolved, as Providers are the more likely target in a dispute if only because there are more Customers for every Provider. Thus, Providers often opt for mandatory mediation and arbitration provisions and seek jury trial waivers in any eventuality.
Customer’s Perspective:
Customers often stand in the less powerful position and are often presented with “take it or leave it” terms. So they are often stuck in the less advantageous contractual position regardless of the issue because the Provider secured better terms at the outset. Customers, therefore, tend to want to parade disputes in a public forum – a court, and to desire jury trials, to introduce elements of uncertainty and jury sympathy as “the little guy,” which can sometimes overcome even the tightest contract provisions.
Conclusion
The advent of GenAI introduces new layers to the conceptual framework and drafting of contract terms, adding novelty and nuance to traditional terms and necessitating a sophisticated and experienced approach to assist with contract negotiation and drafting. Every business and businessperson must navigate these waters with precision, striving for contracts that are tailored to their unique interests and the current legal landscape and also adaptable to current and future trends in GenAI applications and technology. Just like a puzzle growing in complexity, contracts in the era of GenAI require careful assembly, ensuring that each piece aligns with your business and legal interests when GenAI is being used in your business. To solve these challenges, it is best to consult with counsel who has the proper perspective, experience and knowledge to assist you in this endeavor.
Disclosure: This blog post was written with the assistance of GenAI.
Summary: Navigating the complex landscape of pre-litigation dispute resolution is akin to engaging in a well-executed game of chess, requiring foresight, strategy, and the sage counsel of an experienced player. This blog post outlines the multifaceted advantages of resolving disputes before entering the litigation fray, including financial and time savings, greater control over outcomes, and reduced stress. The unpredictability inherent in courtroom battles makes pre-litigation dispute resolution a more predictable and often less costly option. Most judges will encourage parties to settle prior to trial, so why not save the time and money of litigating and take their advice before diving into litigation? Consider the irreplaceable value of seasoned litigation counsel who can act as a co-grandmaster in this intricate chess game, guiding clients toward efficient and effective resolutions. Investing in such counsel not only maximizes your strategic position but also underscores the prudence of avoiding litigation whenever possible. Experienced, client-focused attorneys with a nuanced understanding of both transactional and litigation spheres serve your interests best rather than extending a legal battle for selfish financial gain.
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Most legal scholars agree that more than 90% of disputes settle before trial, and some believe the actual rate is as high as 95% to 99%. Therefore, in many lawsuits, the only people who “win” are the lawyers because they pocket massive fees, only to settle a case on terms similar to what probably could have been accomplished before the lawsuit was filed. Those disputes which settle before a lawsuit is filed are a testament to smart clients and experienced, selfless counsel who resolve disputes even before they escalate into litigation. Relying on analytics, a seminal paper entitled “Who Wins in Settlement Negotiations?” underscores that negotiation tactics and psychological subtleties significantly impact the outcomes of negotiated settlements. Only the most experienced litigators can understand these subtleties and implement these tactics best. Moreover, litigators with transactional experience often have the best perspective on how to settle because of their experience in finding common ground to facilitate settlement.
Pre-litigation dispute resolution requires a nuanced, well-calculated approach, akin to a chess champion contemplating her next several moves. On this “legal chessboard,” each piece on the board represents a different facet of the dispute at hand – whether it is related to a contract, a tortious injury (physical, economic or otherwise), intellectual property or any other legal issue. The key to winning is mastering your strategy under the guidance of experienced litigation counsel. The aphorism “an ounce of prevention is better than a pound of cure” resonates in this realm, as there are many benefits to pre-lawsuit dispute resolution. So what are the benefits of this approach?
The Strategic Advantages of Pre-Suit Dispute Resolution
Financial and Time Constraints
Engaging in lawsuits isn’t just draining on your wallet; it’s an assault on your calendar with constant, time-consuming deadlines. Further, litigation costs can easily skyrocket into the six-figure range, not to mention the emotional and time costs. The age-old adage is that, “in litigation, only the lawyers win.” You want to hire a litigator who can help you try to avoid these costs by trying to secure a resolution prior to litigation, if possible. If it turns out that is not possible, at least you know that you tried, and you will have less regret and more resolve to pursue litigation, knowing that you had no other choice except to litigate. You may also gain valuable insight into the strengths and weaknesses of both sides’ cases.
The Unpredictability Quotient
Many litigation outcomes often amount to a roll of the dice even with a good litigator at your side. Regardless of how compelling your case may seem, the court is a veritable casino of dynamic risks. These include which judge is assigned to your case and that judge’s idiosyncrasies, who your opposing counsel is and whether they know the judge, how busy the court is, whether your case is susceptible to pre-trial dispositive motions such as summary judgment and whether trial will involve a jury. This unpredictability is enough to push even the most stalwart litigants toward pre-lawsuit dispute resolution.
The Mutual Benefit Framework
Often, both parties have skin in the game to reach an amicable settlement. The plaintiff might accept a lesser amount to mitigate the risk of walking away empty-handed, while the defendant may pay a bit more to sidestep the inefficiencies and uncertainties of litigation. However, by settling before litigating, both sides can tolerate settling beyond their preferred settlement aspirations in exchange for gaining certainty of resolution, saving a great deal in legal fees and avoiding the thorny inconvenience of litigation.
Judicial Endorsement
Courts aren’t just passive venues for litigation; they actively champion settlement through direct negotiations, mediation and other ADR methods, imploring parties to pursue a more efficient and less antagonistic way to resolve disputes. If judges – who are generally experienced jurists – push these approaches, why not consider them yourself before filing suit, saving a lot of time and money? You don’t need the court to tell you what I am telling you now. And they will tell it to you anyway at some point in a lawsuit. So why waste money and time if you can resolve the dispute without litigation? The result is that you spend less money on legal fees, you’re able to consider a larger range for compromising in settlement (but gaining the certainty of a resolution) and experiencing less aggravation. Less money, less time and less risk are valuable benefits.
Autonomy and Control
Unlike the rigid, prescriptive nature of the litigation process and judicial decisions, settlements allow parties a level of control and customization in the outcome. It is no coincidence that one of a judge’s most effective settlement techniques is to tell the parties they don’t want to find out what s/he really thinks of their case, a veiled but serious threat that few parties want to tempt.
The Expediency Factor
Time is money. Settlements provide an efficient resolution that enables parties to focus on what they prefer to be doing: making money and enjoying life, instead of risking the opposite.
The Predictability Element
While litigation may offer more drama, it comes with the risk of erratic outcomes and unpredictable costs. Settlements, by contrast, offer a pragmatic and more predictable path.
The Emotional Aspect
Litigation is not for the faint-hearted. Doing it properly involves great time, expense and risk. These factors can exact a heavy psychological toll that should make the idea of a swift closure offered by pre-lawsuit settlements an attractive proposition for even the most stout-hearted clients.
Preservation of Relationships
When business or personal relations are at stake, settling early can often provide the balm needed to maintain these connections, as opposed to the corrosive effects of litigation, where the statements you make become a part of a permanent record, most if not all of which is accessible by the public. I have settled many disputes where the outcome involves the parties continuing to do business together; indeed, a settlement can generate the next business deal.
The Veil of Confidentiality
Settlements usually come with confidentiality clauses, a feature particularly appealing to businesses and individuals keen on safeguarding sensitive information or reputations. Accomplishing settlements prior to litigation offers the same degree of privacy where the public need not have access to your “dirty laundry.” Furthermore, some parties are more likely to settle if the fact of their settling is not known to the public. This can only happen pre-litigation.
The Regret Element
If you don’t at least try to resolve your dispute before litigation is initiated, you will never know if you could have resolved it without the litigation. Not all disputes can be settled before litigation. However, in those cases, at least you will know that you tried to resolve the dispute early in the most efficient way possible, and you will know that you had no choice but to litigate. This knowledge can prove invaluable in helping you develop the resolve to withstand litigation until a serious settlement opportunity presents itself.
Conclusion
Navigating how to move a civil dispute toward a resolution prior to litigation is like playing a complex game of chess. Each decision can have far-reaching consequences, and the advice of an experienced litigator can be the difference between a winning and losing strategy. Whether you’re faced with a dispute involving a contract, a business transaction, a corporate matter, a real estate dispute, an intellectual property matter or any other type of civil dispute, an adept attorney can serve as your co-grandmaster, helping you navigate the chessboard with strategic finesse. So don’t leave the outcome of your dispute to less experienced or trigger-happy litigators; invest in counsel skilled enough to play the game at the highest level and maximize the potential to resolve a dispute in the most efficient, painless way possible. Find an attorney with the experience, intelligence, integrity and selflessness to strive for the best outcome for you rather than the most lucrative work for the attorney. At the Law Office of Isaac H. Winer, you get smart, experienced and effective lawyering that is worthy of your trust.
*Summary: AI is revolutionizing the legal industry by automating tasks like document preparation and legal research, allowing lawyers to be more efficient, focus on more strategic work, and provide maximally informed services. This not only improves efficiency but should also result in cost savings for clients by the time that is saved. However, while AI technology is powerful, it’s not foolproof. Over-reliance can lead to inaccuracies and poor judgment, highlighting the need for a skilled attorney who can effectively integrate AI with extensive experience. Your next legal decision shouldn’t be left solely to algorithms or outmoded lawyering; it requires a nuanced approach combining both technological and seasoned human intelligence.*
What many view as the Industrial Revolution of the 21st century – artificial intelligence – is not sparing the legal industry. AI is already disrupting the traditional frameworks of legal practice, from the highest levels of litigation and transactional work product to more mundane but time-consuming activities such as correspondence, discovery and due diligence, contract preparation and document management. Yet, the great promise of AI may also come at a great price. As we stand on this precipice, understanding the benefits and risks inherent to this technological frontier is essential for lawyers and clients alike.
The Promises: Submarining vs. Snorkeling. The law is like a vast ocean. It is full of complex rules and regulations, and it can be difficult to navigate. AI is like a powerful submarine that can help lawyers explore this ocean more efficiently. Without AI, lawyers would have to swim, snorkel and scuba through the ocean, manually searching for information and generating work product. This is often a slow and tedious process. AI can automate many of these tasks, allowing lawyers to focus on more strategic work. For example, AI can be used to undertake legal research instantaneously, draft documents and analyze large datasets, identifying patterns and trends that are difficult to spot manually. This can save lawyers and clients a significant amount of time and money. It can also help lawyers improve the quality of their work, enable them to focus on more strategic tasks and avoid making mistakes, and thereby provide higher quality work product and results to clients at a lower cost.
For Lawyers: Transcending the Mundane. AI technologies harness natural language processing and machine learning to revolutionize labor-intensive tasks, such as drafting correspondence and aspects of contracts, reviewing documents, undertaking and reviewing discovery and even drafting legal briefs. Imagine the human effort it takes to sift through thousands of pages of information to locate a crucial piece of evidence or a crucial piece of information determining the value of a transaction. With AI, this becomes a task of mere hours, not days or weeks. Imagine the knowledge and prowess required to draft a litigation brief which applies complex legal authorities to detailed facts. By automating such tasks to an extent and at some point perhaps entirely, AI can maximize the ability of lawyers to do what they do best: strategize and apply their experience and judgment to advocate, counsel and negotiate for their clients.
For Clients: Time and Cost Efficiency. As a submarine directed by human captains, AI can navigate the ocean of law and legal challenges with lightning speed and quality results. It is a powerful tool that can save lawyers time and effort so that clients obtain services and work faster at comparatively lower costs, especially for clients paying their lawyers on an hourly fee basis. In short, AI is a valuable asset that can help lawyers generate higher quality work faster and achieve results more economically for clients.
The Imperative for AI-Savvy Counsel: Virtuoso Meets Orchestra. Picture a virtuoso musician; impressive on their own, but transformative when paired with an orchestra. The modern lawyer is that musician, and AI is the orchestra. Their ability to integrate, harmonize, and orchestrate will be the measure of their effectiveness in a landscape teetering between tradition and innovation. Thus, choosing the right legal counsel goes beyond expertise and reputation; it should encompass technological acumen. A lawyer empowered by AI becomes a formidable asset, akin to a master chess player with a supercomputer, capable of leveraging AI’s power with human discernment. The lawyer versed in AI and capable of applying its power in the practice of law is the virtuoso, and AI is the orchestra; the ability to harmonize between the two is what will distinguish exceptional services from more traditional but average work.
Navigating the Depth Charges: Understanding the Limitations of AI in the Law
Illusion of Infallibility. While AI may streamline operations, it is not foolproof. In healthcare, AI misdiagnoses or treatment can lead to catastrophic outcomes. Translate that into legal terms – missing a crucial contract clause or concept of law could lead to less competent and potentially irreversible results. Thus, over-reliance on AI’s supposed ‘infallibility’ can be perilous. One recent example comes to mind: I was curious about an area of law with which I was not familiar and sought an answer using a particular AI application. The AI engine provided me with an answer to my question – the answer that the AI “knew” I was hoping to hear and, when I asked for authorities to support the answer, the AI engine provided me with case law that never existed in reality even though the form and substance of the legal citation was so precise and true to form (though not substance) as to appear a legitimate authority. However, when I tried to find the court decision that the AI had cited, it did not actually exist. This is called an AI hallucination – a confident response that is completely fabricated. When I confronted the AI engine with its mistake, it acknowledged that I was correct, admitted that no such case existed, and then apologized for its error, essentially saying it was just a language model trying to provide me with the information I was seeking. Had I not had the insight and experience to ascertain if the case provided was legitimate, I might have made the terrible mistake that less knowledgeable lawyers recently made, for which they were sanctioned.
The Burden of Misplaced Confidence. The promise of swift and efficient resolutions may lure lawyers and clients alike into putting undue trust in AI-driven legal services. Picture a layperson blindly following a GPS into a dead-end; that’s the risk lawyers and clients take when they forsake human expertise for AI’s algorithmic judgment, potentially overlooking legal nuances that could be detrimental to their cases.
The Balanced Way Forward: Equilibrium Through Integration. Striking a balance between AI’s efficiencies and human expertise requires an integrated approach. Like a master painter blends colors to create a masterpiece, the astute lawyer employs both machine-generated data and experienced human judgment to create a cohesive legal strategy and higher quality work product. Utilize AI for initial drafts and data-crunching but let experienced human talent shine at negotiation tables and in courtrooms.
Your Next Legal Strategy Could Be Your Most Formidable Asset or Your Achilles Heel
As we navigate this thrilling yet fraught intersection of law and technology, the winners will be those who learn to balance human vs. technological scales wisely. It’s a nuanced play between human and machine, where neither should upstage the other. If you find this landscape as compelling as it is challenging, I invite you to engage further in this dialogue. Your next strategic decision in legal matters is too critical to be left to chance, a mere algorithm or poor legal judgment and/or lack of experience. Choose wisely.
Disclosure: This blog post was written with substantial assistance from the generative AI engine known as ChatGPT4. In the past, a piece like this would have taken me the better part of a day or longer to write. Using ChatGPT4, I accomplished my goal of completing this blog post in approximately ninety minutes, including the time to program the AI engine to mimic my experience, tone and goals. This is the promise AI holds for attorneys and clients alike. But pitfalls loom – an inexperienced attorney can misuse AI and generate work that contains errors and risks great loss for attorneys and clients alike. Like any powerful piece of technology, it is most effectively deployed by an intelligent, experienced and discerning attorney.
Did you know that selling stock in exchange for an unsecured promissory note may be unlawful, void or voidable? In an area like Silicon Valley where stock may be worth a fortune from the second a company is born, companies might think to be creative in order to sell stock to a party that’s unable or unwilling to pay large sums for it immediately. One might think that a safe course is to sell the stock for a promissory note to pay for the stock later, such as when it’s worth more than the sum of the note.
However, a somewhat obscure law in California, which is echoed in other states, makes it unlawful for a corporation to sell or issue stock in exchange for a promissory note (a debt) that is not secured by property other than the stock itself. Section 409 of the California Corporations Code makes it unlawful for a California corporation to sell or issue stock for a promissory note that is not “adequately secured by collateral other than the shares acquired.” Thus, a company cannot sell or issue stock for a promissory note, even if the note is secured by the stock itself. So what consideration in a sale of stock is valid? The answer is money, services already rendered, valuable property received or a promissory note that is secured by property other than the stock itself.
Delaware corporations, which are not subject to this provision of California law, are nevertheless subject to a similar statute under Delaware law. Section 152 of Delaware’s General Corporation Law provides that “[t]he board of directors [of a corporation] may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof.” While this statute is less clear on the issue than the California law, Delaware case law arguably supports a construction of the Delaware statute the same as the California law, and Section 152 itself implies the corporation must receive some actual benefit in exchange for the issuance of stock. Interestingly enough, the Delaware Constitution (Article IX, Section 3) used to expressly prohibit the issuance of stock “except for money paid, labor done or personal property, or real estate or leases thereof actually acquired by such corporation.” However, this provision was repealed in 2004, leaving the issue somewhat more ambiguous under current Delaware law. One would have to check the legislative history to understand why that section was repealed, but in any case the statutory provision remains, along with at least one case which cites both as a basis to consider the stock sale invalid. See Prizm Group, Inc. v. Anderson, 2010 Del. Ch. LEXIS 105, 2010 WL 1850792 (Del. Ch. May 10, 2010).
The legal implications of these statutes are potentially not good for anyone involved in the leveraged sale of stock – neither the company, its management nor the putative purchaser. Taking the last case first, the sale to the buyer is likely void or voidable as against the buyer, which means the corporation may rescind (cancel) the sale of stock arguably at any time the issue is raised, at least until proper consideration is received by the corporation, such as all money due on the debt that is at issue. (Note that the sale is probably not voidable by the buyer as against the corporation, and the note is almost certainly enforceable by the corporation against the debtor, the above notwithstanding.) As respects the company, an invalid sale of stock might expose the company to liability from other shareholders who might argue that their equity in the corporation has been unfairly diluted by a sale of stock without real value received in return. And officers or directors who approved the sale might also be exposed to action by the corporation and/or by other shareholders on a similar theory of liability, as might arise in the context of a shareholder derivative action (a lawsuit brought by one or more shareholders in the name of the corporation against officers and/or directors for mismanagement that harmed the corporation or its shareholders).
Turning to limited liability companies, it is much less clear and, at least for now, doubtful that the limitation on consideration for the sale of equity applies to LLC’s. The statutes cited do not apply to LLC’s – they are quite specific to corporations only. With that said, in principle, one could make the same policy argument in the context of LLC’s – that the sale of equity in exchange for an unsecured note does not provide actual value to the company and thus frustrates existing equity holders and creditors. However, the statutory and case law for LLC’s on this is thus far non-existent based on research done to date, so currently there is no known legal basis to support this policy rationale as applied to LLC’s, or other types of business associations for that matter.
However, corporations, their managers and purchasers would be wise to heed the law in California, Delaware and other states that generally bar an unsecured debt obligation as consideration for the sale of stock. Transactions violating these laws will be void or voidable, and the participants in such stock sales may be subjecting themselves to inadvisable risks and liabilities. So, as the saying goes, buyer beware.
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Did you know that your company or the one that you represent may not have the right to enter into contracts, sue or defend itself against a lawsuit in California? Well-settled law, ignored by many businesses and even lawyers to some degree, can disqualify a company from entering into contracts or litigating in California if it fails to establish and maintain a qualified status with the Secretary of State (“SOS”) and the Franchise Tax Board (“FTB”), the state taxing authority.
In Silicon Valley and elsewhere throughout the state, a large percentage of start-ups decide to form their company – be it a corporation or an LLC – in a state other than California, such as Delaware. However, if these foreign companies plan to have a presence or otherwise do business in California, state law requires these companies to register for qualification with the California Secretary of State, pay an annual franchise tax and potentially pay state income taxes the same as an entity that is formed in California. If foreign companies fail to comply with these requirements, they forfeit all “corporate powers, rights and privileges” in California, which include not only the right to maintain a lawsuit in the state, but also the power to enter into valid contracts with other persons or entities. See Cal. Corps. Code §§ 2105, 2203 and Cal. Rev. and Tax. Code § 23304.1; and see Neogard Corp. v. Malott & Peterson-Grundy, 106 Cal.App.3d 213, 219-220 (1980) (corporation transacting business in California without qualifying to do so risks a number of sanctions, both civil and criminal, including the right to maintain lawsuit). Contracts formed while a company’s status is invalid (i.e., unqualified or suspended) are voidable at the option of the other party; this means that the contract remains in effect but the other party may cancel it. White Dragon Prods. v. Performance Guars., 196 Cal. App. 3d 163, 168-169 (1987) (contract entered into when party was not qualified with state is voidable and remains so even after party qualifies in California).
While a foreign company does have the right to defend itself against a lawsuit in California, service of the lawsuit may potentially be accomplished by serving the Secretary of State instead of the company directly, see e.g. Cal. Corps. Code § 17708.07 (limited liability companies only), so the company may lose before it knows it has been sued. And, in any event, every unqualified foreign entity is deemed to have submitted to California jurisdiction, which may prevent the entity from claiming lack of jurisdiction even after they qualify with the state.
Further, if your company was formed in California, the loss of rights and powers is even more severe than for a company formed in another state. The lost “corporate powers, rights and privileges” include not only the voidability of contracts formed during suspension and the right to maintain a lawsuit in the state but also the right to defend against one, too. Damato v. Slevin, 214 Cal. App. 3d 668, 673 (1989). For example, if a California entity is suspended for failure to pay taxes due to the FTB or failure to file a Statement of Information (for a prolonged period), the corporation may be entirely “disabled from participating in litigation activities” during the suspension. See Tabarrejo v. Superior Court, 232 Cal. App. 4th 849, 863 (2014), review denied (Apr. 1, 2015).
Little known to most people, including even lawyers, is that it is a misdemeanor (you read that right– a crime) for any person to attempt to exercise “the powers, rights, and privileges of a corporation that has been suspended pursuant to [Cal. Rev. & Tax. Code] Section 23301 or who transacts or attempts to transact … business in this state on behalf of a foreign corporation.” Cal. Rev. & Tax. Code s. 19719. Further, an attorney who knowingly represents a suspended corporation and conceals this fact from the court may be subject to sanctions. See Palm Valley Homeowners Ass’n, Inc. v. Design MTC, 85 Cal.App.4th 553, 563 (2000). Fortunately for insurers and their lawyers, the criminal statute does not apply “to any insurer, or to counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation,” and the statute does not “create or limit any obligation upon an insurer to defend a suspended corporation.”
What to do if your company is suspended? A suspended company may regain its rights by undergoing a process known as revivor, and the steps to accomplish this are outlined on the websites of the SOS and FTB. Any competent business lawyer or accountant should be able to assist you. After a company is revived by the State, it regains the power to enter into valid contracts and to maintain and defend against lawsuits. Damato, 214 Cal.App.3d at 674. But any contract made during the suspension remains voidable by the other party.
To conclude, whether your company was formed in California or elsewhere, if it wants to do business in California, it must maintain a valid status with the Secretary of State and Franchise Tax Board, or you may find that doing business in California can be perilous and costly. In most cases, obtaining a valid status is not complicated or costly so, if your company is presently not in good standing with the State, it should act promptly to rectify this and maintain a valid status.
As evidenced by the recent hype about the new Instagram smart app icon, companies invest a lot of time and money to develop the look and feel of a smart device application (“app”) in order to promote brand recognition. OK, so you know that your app is a valuable piece of intellectual property, but what are you doing to protect this asset? With the market for apps projected to reach $2 trillion by 2020, it is clear that apps will be a primary source or gateway for revenue for most businesses in the 21st Century. Yet, few companies give due consideration to how they can protect this increasingly valuable IP asset.
To protect the look and feel of your app, trademark law and the somewhat less known law of trade dress may be your answer. In a recent case that I litigated for a plaintiff in the U.S. District Court for the Northern District of California, the Court upheld my theory that the look of its smart device app icon was a protectable trade dress feature. The case involved competing “selfie” photo editing apps where my client alleged that the defendants were infringing not only my client’s registered trademark for the app but also the non-functional aesthetic features of the app, including the app icon, which is used to market the app in virtual store fronts like Apple’s App Store and the Google Play Store.
In the complaint, we alleged that (1) our app icon was “so distinctive and essential an element of [our] … trade dress throughout the app that the app icon is additionally, in and of itself, an entirely protectable trade dress standing on its own,” and (2) the defendants were using “a highly similar app icon….” The defendant moved to dismiss our trade dress claim as being improperly alleged, but the Court denied the motion, finding that our allegations did satisfy the standard of providing “a complete recitation of the concrete elements of [our] alleged trade dress….” The Court understood that we were basing our trade dress claim, at least in part, on the theory that our app icon stood “on its own” as an independently protectable trade dress feature. See ArcSoft, Inc. v. CyberLink Corp., No. 15-cv-03707-WHO, 2016 U.S. Dist. LEXIS 28997, at *7 (N.D. Cal. Mar. 7, 2016).*
Although the courts have grappled for years with how to apply trademark law to intangible products and services like software, my research shows that this is the first reported decision by a federal court recognizing that an app icon may, in and of itself, constitute an independently protectable trade dress feature.
Traditionally, trade dress is broadly defined as the total image and appearance – “the look and the feel” – of a product or service which indicates or identifies the source of the product or service and distinguishes it from those of others. One classic example of trade dress in a tangible form is the original contoured Coca-Cola bottle shape. Designed in 1916 by a bottle company with the specific intent to distinguish Coca-Cola from imitating competitors, the Coke bottle is now recognized by billions of consumers as a designation of the Coke product brand.
One hundred years later as smart device apps flood the marketplace, the primary if not only aesthetic feature that distinguishes one app from another on the “shelf” of the online store is the app icon. Businesses invest significant resources to develop the software that enable apps to run, and they also incur great expense on art and graphic design to make apps and icons aesthetically pleasing and distinctive. Given such extensive capital expenditures, it behooves businesses to protect app trade dress no less than they would protect any other product or service subject to trademark protection. And as my selfie editing app case proves, trademark law is expanding to accommodate the virtual goods and services of the 21st Century market. So be smart, and dress your app smartly.
*About the Author: Isaac Winer is a civil litigator and business lawyer at the Law Office of Isaac H. Winer in Palo Alto, California. He also serves as Senior Counsel to Intellectual Property Law Group LLP in San Jose, California.
On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (the “DTSA”), creating a new federal civil claim for misappropriation of trade secrets and adding measures beyond those available under state law that give trade secret owners more fire power against trade secret theft but which also create more responsibility on employers as well as more protection for workers.
First, the basics. Until now, only state law provided a civil claim for misappropriation of trade secrets. And, while all but two states have adopted the model Uniform Trade Secrets Act (“UTSA”) – New York and Massachusetts being the exceptions with their own trade secret laws, aspects of many state laws still vary from state-to-state, making a truly uniform national trade secrets law unavailable until now. The DTSA creates a new civil claim for misappropriation of trade secrets that can be asserted in federal court by any trade secret owner against anyone “if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” DTSA, s.2(b)(1). Under the DTSA, a trade secret is defined essentially the same as it is defined under state law: any information where (A) “the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.” DTSA, s.4(a)(2) (“trade secret” has same meaning as 18 U.S.C. s. 1839).
Next, the new fire power of the DTSA. Until now, unless a theft of trade secrets was criminal – a high bar, the only form of immediate relief an owner could obtain was a temporary restraining order (TRO) or other injunction to stop the thief from using or disseminating a trade secret, and potentially requiring a thief to turn over property containing trade secret information. Now, under the DTSA, a trade secret owner can ask a court – without any notice to the alleged thief (an “ex parte” request) – to order law enforcement to seize property that is “necessary to prevent the propagation or dissemination of the trade secret” that is the subject of the lawsuit. DTSA, s. 2(b)(2)(A)(i). Notably, however, such ex parte seizures may only be granted “in extraordinary circumstances” where it appears from “specific facts” that a TRO is inadequate because the party against whom the order is sought would “evade, avoid or otherwise not comply with such an order.” DTSA, s. 2(b)(2)(A)(ii). Other limitations make this remedy unlikely in all but the most extreme cases, not only because of the cost of seeking it but the potential penalty of paying actual and punitive damages and attorney’s fees to a party against whom a wrongful or excessive seizure was obtained.
Finally, the underbelly of the DTSA for trade secret owners. In addition to protecting defendants against unjustified seizures, the DTSA also prohibits injunctions that “prevent a person from entering into an employment relationship” and requires that any conditions placed on such employment “shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” DTSA, s. 2(b)(3)(A)(i)(1)(I) (emph. added). Further, the DTSA also protects whistleblowers (e.g., workers who report illegal activities) by providing immunity for disclosing trade secrets to attorneys or government officials and by requiring that employers provide employees with notice of this immunity on pain of losing the right to punitive damages and attorney fees in a lawsuit against an employee for violation of any trade secrets laws. To clarify, the DTSA defines “employee” to include any person who works “as a contractor or consultant for an employer.” DTSA, s. 2(b)(4). Put together, the provisions of the DTSA that protect workers provide a clear message to employers that the DTSA does not only exist for their benefit.
In sum, the DTSA creates a bundle of new tools for trade secret owners to defend against trade secret misappropriation and provides defendants and workers with a bundle of new rights to help ensure the new tools are not abused. Put together, the DTSA is a significant advance in trade secrets law which, if nothing else, will serve to fuel the engine of litigation on both sides of the divide between owners and individuals who create and work with trade secret information.
New court cases in California are testing the ability of established labor law to distinguish between employees and independent contractors in the new “sharing economy,” recently focusing on the status of drivers in ride-sharing companies Uber and Lyft. Both firms, which view themselves as “technology” companies rather than transportation firms, have preferred to categorize their drivers as independent contractors in order to avoid paying driving expenses, overtime, payroll taxes, workers compensation and other costly features of the employee grade. However, a recent ruling by a Deputy Labor Commissioner in California, coupled with at least two federal class action cases currently pending in California, have thrown the debate wide-open as to whether Uber and Lyft can legitimately classify their drivers as independent contractors.
In the state case, serial litigant Barbara Berwick – who has reportedly been a plaintiff many times since 1987 – filed a claim against Uber with the California Labor Commissioner alleging that she was not an independent contractor but rather an employee and was therefore entitled to expense reimbursement and unpaid wages (were she to prove any), despite the fact that Berwick had Uber pay her fees to a separate corporation. In a 17-page ruling issued in June 2015, Deputy Labor Commissioner Ellen Kennedy concluded that Berwick was in fact an employee in light of how she worked as an Uber driver, and thus was entitled to have expenses reimbursed. Kennedy based her decision on well-settled, albeit 20th Century, California law which lays out a broad array of considerations to help distinguish between employees and contractors. While the main test is whether the principal engaging the worker has “the right to control the manner and means of accomplishing the result,” numerous secondary factors assist in guiding this determination. These include: (i) whether there is a right to terminate at will; (ii) whether the service provider is engaged in an occupation or business distinct from that of the principal; (iii) whether the work is usually done under the direction of the principal or by a specialist without supervision; (iv) the skill required in the particular occupation; (v) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (vi) the length of time for which the services are to be performed; (vii) the method of payment – whether by time or by project; (viii) whether or not the work is a part of the regular business of the principal; and (ix) whether or not the parties believe that they are creating an employer-employee relationship. While these factors are most prominently laid-out in a California supreme court case from 1989, they are based in part on decisions of the court and treatises dated almost fifty years still earlier.
Nevertheless, this is the same law being used by two federal judges in two class actions, also pending in California, in which drivers are suing Uber and Lyft based on the same contention – that they are employees, not contractors – and are therefore entitled to all of the benefits and protections of employees that are not available to contractors. Issuing very similar rulings on the same day in March 2015 (hardly a coincidence), judges Edward Chen and Vince Chhabria each concluded in their ruling that applying traditional, 20th Century tests for employment poses significant challenges to deciding this issue for “sharing economy” companies like Uber and Lyft and that, absent legislative intervention, the question will need to be decided by juries in court cases, which “will be handed a square peg and asked to choose between two round holes.” To be sure, potentially billions of dollars rest in the hands of these juries, and the stakes are no less in the state matter involving Uber driver Barbara Berwick, where Uber has appealed the regulatory ruling to San Francisco Superior Court. While it will take time for these and other cases to wind through the legal system, they are forming new tectonic plates beneath the sharing economy. In all likelihood, state legislatures and regulators will begin jumping into the foray, enacting new rules to address workers rights in this brave new world. The rules will almost certainly continue to be defined on a state-by-state basis and, if recent developments are any indication, the scales seem to be tipping in workers’ favor. In late June 2015, it was reported that grocery delivery service Instacart will convert its “shoppers” from independent contractors to employees. Aside from being good for labor, a trend toward employee status may also not be so bad for the public. While a pro-employee trend may mean higher prices as companies try to pass on at least some of the new costs to customers, the public should benefit from more reliable and safer services. This involves complex business, law and insurance issues, which will be the topic of another article.
To learn more about the author, please visit my website at www.ihwlaw.com.
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